Question No.2 Explain Irrelevance Theory of Capital Structure of Miller & Modigilani? Answer:- Capital Structure Irrelevance Theory: The development of the theory of capital structure begins with the capital structure theory of miller and Modigliani. Dividend irrelevance comes from the MM model, that there is no transaction & flotation cost, taxes, identical rate of interest and information. It is stated that the income from dividend and capital gain will be the same. There is no difference between the two options. If dividend gain is not enough, shareholder can sell the share for liquidity of cash and vice versa. Theory states that policy of the dividend payout is not relevant. The Irrelevance Theory of Capital Structure;- - Guide us about taxes and financial disturbance that affect the decision regarding capital structure. - help us to know the investors expectation, the sources of finances, and the rate of these sources and different costs. - We cannot determine the optimal capital structure for a given company, but we know that it depends on the following: o the business risk of the company. o the tax situation of the company. o the degree to which the company’s assets are tangible. o the company’s corporate governance. o the transparency of the financial information. The dividend policy irrelevance has been derived from this theory because shareholders are not concerned about the receipot of dividends and acknowledgment of the capital gain. The two Economists i.e Modigliani and Miller concluded a theory that the value of an organization is not affected the use of its finances. Raise capital by issuing stock or debt, by following capital structure irrelevance. Since the publication of the papers by Modigliani and Miller, n... ... middle of paper ... ... the fixed/variable cost of operating leverage, the growth rate or maturity, the profitability, taxes payment, control problems, management attitude/experience, rating of the company and the market conditions. a) Theories of Dividend Policy: The decision regarding payment of dividend or retaining the profit in the business is covered under dividend policy. It is one of the important financial policies about payment of dividend and at what amount which is influenced by the company's policy. If surplus cash is available pay out some or all of those surplus earnings in the form of cash dividends otherwise retain it for further investment or repurchase own stock. There are three theories: Dividends are irrelevant: Investors don’t care about payout. Bird-in-the-hand: Investors prefer a high payout. Tax preference: Investors prefer a low payout, hence growth.
In SIVMED’s case, based on the definition of WACC, all capital bases should be included in its WACC. These include its common stock, preferred stock, bonds and long-term borrowings. In addition to being able to compute for the costs of capital, the WACC also determines how much interest SIVMED has to pay for all its activities. The value of the firm’s stock, which we want to maximize, depends of the after-tax cash flow. Hence, after-tax values for WACC are also needed. Furthermore, cost of capital is used to determine the cost of each debt, stock or common equity. Being able to analyze these will be essential into deciding what and how new capital should be acquired. Hence, the present marginal costs are ideally more essential than historical costs.
Theoretically, it is the foundation of simpleness and reasoning for stock valuation as any cash payoff from company is entirely in form of dividends. However, in practice, this model require further hypothesis on company’ dividend payments, future interest rate and growth pattern. Therefore, it is assumed that the DDM model merely applies to evaluate roughly minor proportion of the value of company’ share price. Specifically, the JB HI-FI value obtained from the DDM is 30.65 higher than their actual currently trading share price 24.1; a different of 6.55, and then the stock is undervalued. Consequently, DMM is not applicable for stock price valuation in case of JB HI-FI since it is not an individual approach of stock
A very slim minority of firms distribute dividends. This truism has revolutionary implications. In the absence of dividends, the foundation of most - if not all - of the financial theories we employ in order to determine the value of shares, is falsified. These theories rely on a few implicit and explicit assumptions:
We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.
The many factors affecting WACC are: general economic conditions, market conditions, the firm's operating and financial decisions, amount of financing, business risk, constant financial risk, and dividend policy. These factors have a direct impact on the variables used in calculating WACC. Such variables include the term structure of interest rate, the risk free rate, the beta, the market risk premium, the firm's marginal tax rate, and its capital structure.
Apply ONE theory of the causes of political conflicts to ONE real-world case of conflict to help explain why/how the conflict occurred.
Epistemology is the branch of philosophy that studies knowledge. It is mainly concerned with the nature and scope of knowledge. It attempts to answer the basic question of what distinguishes true or adequate knowledge from otherwise false or inadequate knowledge (Heylighen). The major branches of epistemological theory are rationalism, empiricism and mysticism. Rationalism implies that knowledge is obtained through reason and introspection. Ones ideas are justified by sense experience, but if the senses and intuition are in conflict, the sensory evidence must be discarded. In empiricism, knowledge is obtained through observation and experiment. Models and theories may be used to organize this sensory experience, but if theories contradict experience they are wrong. In mysticism, knowledge is obtained through faith, emotions or revelation but if observation or intuition contradict, the knowledge is thus deemed wrong (“Rationalism”). Doubt, as a Persian Proverb once said, is the key to knowledge. It is one of the influencing factors in the expansion of knowledge. A fact that is conside...
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
Managers are encouraged to act more in the interest of shareholders and the amount of leverage in the capital structure affects firm profitability (Ebaid, 2009).
Ÿ Capital structure/investment - This information is taking from the Balance sheet, but also from the Profit and Loss Account. This is examining the sources of finance the company has used and also looking at it as a potential investment opportunity. There are certain features, which must be present if financial information is to meet the needs of the user. The two most important features are that: Ÿ The information should be relevant to those who are using it.
The final model used to compute the cost of capital was the earning capitalization model. The problem with this model is that it does not take into consideration the growth of the company. Therefore we chose to reject this calculation. The earnings capitalization model calculations were found this way:
Economic factors affecting negative or positive way the companies. The inflation and currencies rates have big influence.
Modigliani & Miller, M&M, (1958) found that in a world without taxes, the value of the firm is not affected by its capital structure, and also that the total return to investors remains the same regardless. M&M showed the
Epistemology is the branch of philosophy concerned with the theory of knowledge. Epistemology studies the nature of knowledge, justification, and the rationality of belief. Much of the debate in epistemology centers on four areas: the philosophical analysis of the nature of knowledge and how it relates to such concepts as truth, belief, and justification, various problems of skepticism, the sources and scope of knowledge and justified belief, and the criteria for knowledge and justification. Epistemology addresses such questions as "What makes justified beliefs justified?", "What does it mean to say that we know something?" and fundamentally "How do we know that we know?"
Sources of finance are the different methods for a business to earn and obtain money. There are lots of ways to obtain money but two large basic sources of finance, which are the “owner’s capital” and “capital borrowed”. They are also called internal sources of finance and external sources of finance. In those sources, they are mainly divided in two groups, which are short-term sources of finance and long-term sources of finance.